Pourquoi

Pourquoi=20 les variations de la production d=92or n=92ont aucune importance=20

Par=20  :=20 Steve Saville

www.speculative-investor.com

=A4----=A4=20

Introduction

Most=20 analyses of the gold market consider the annual change in the = amount of=20 gold produced by the mining industry to be an important = determinant of the=20 gold price, with bulls regularly supporting their case by citing = the=20 mining industry's inability to ramp up production and bears = sometimes=20 claiming that increasing mine production will eventually weigh the = gold=20 price down. Our contention, however, is that the annual supply of=20 newly-mined gold is so small relative to the existing aboveground = supply=20 that changes in mine production should be ignored when assessing = gold's=20 prospects.

We=20 warn you that the following discussion is quite lengthy (by our=20 standards), but we wanted to cover most aspects of this important = topic --=20 important, that is, for anyone who genuinely wants to understand = the gold=20 market -- in one hit.

The=20 aboveground gold supply (and why it makes sense to analyse gold as = if it=20 were a currency)

The=20 gold that gets produced each year doesn't get consumed; rather, it = gets=20 added to the existing aboveground stock. This means that the = entire=20 aboveground stock represents potential gold supply. In this = respect, gold=20 is more like a currency than a commodity.

Now,=20 we realise that not all the gold that was ever mined is currently = in a=20 readily saleable form, but a substantial chunk of it is. To be = more=20 specific, it has been roughly estimated that around 150,000 tonnes = of gold=20 have been mined throughout history, about two-thirds of which has = been=20 mined since 1945. Of this 150,000 tonnes, we estimate that around = 108,000=20 tonnes* are held for monetary/investment purposes. = Monetary/investment=20 (MI) gold includes official gold holdings (the gold kept by = central banks=20 and the IMF), privately-held bars and coins, the gold held by ETFs = and=20 closed-end funds, and monetary jewellery (24-carat jewellery that = is held=20 solely as an investment or a store of value). This 108,000-tonne = figure=20 is, in our opinion, a rough but reasonable estimate of the MINIMUM = amount=20 of gold in readily saleable form, and clearly dwarfs the 2,400 = tonnes of=20 gold produced by the mining industry over the past = year.

Analysing=20 the gold market as if new mine supply dominated the supply side of = the=20 equation would be like analysing the dollar market as if the only = dollars=20 that really mattered were the new dollars that came into existence = over=20 the past year. The fact is that a new dollar created today will = become an=20 indistinguishable part of a total supply that includes every = dollar=20 created, but not yet extinguished/destroyed, up until today, and = it is=20 this total supply, combined with the associated demand for this = total=20 supply, that determines the dollar's price. Moreover, it could be = argued=20 that the gold mined each year is less important to gold's = supply-demand=20 balance than are the dollars created each year, because new dollar = supply=20 typically constitutes a much greater percentage of the existing = stock than=20 does newly-mined gold supply. Specifically, whereas the total = aboveground=20 supply of saleable gold increases by about 2% every year, the = total supply=20 of dollars sometimes increases at a double-digit rate and rarely = increases=20 by less than 5%.

Putting=20 things into perspective

As=20 discussed above, the total supply of gold in readily saleable form = is=20 probably at least 108,000 tonnes, which stands in stark contrast = to the=20 current annual mine supply of around 2,400 tonnes. This suggests = that=20 changes in investment demand (changes in the demand for the total=20 aboveground stock) are more than 40-times more important to gold's = price=20 trend than changes in mine supply. To put it another way, a 0.25% = (one=20 quarter of one percent) change in investment demand is more = important than=20 a 10% change in mine supply.

Data=20 provided by the London Bullion Market Association (LBMA) lend = additional=20 support to the argument that changes in annual mine supply are = tiny in=20 relation to the overall market. The LBMA reports that an average = of around=20 20M ounces (650 tonnes) of physical gold changes hands on the = London gold=20 market every day. This means that the equivalent of more than one = year's=20 mine supply changes hands in the space of only four average = trading days=20 on the London market. And London is not the world's only market = for gold=20 bullion.

If=20 changes in mine supply are irrelevant, then what is=20 relevant?

Over=20 periods of 2 years or less, gold's price trend is usually = determined by=20 the combination of the US dollar's exchange value, credit spreads, = nominal=20 interest rates, inflation expectations, and the yield curve. = However, the=20 long-term is the focal point as far as this discussion is=20 concerned.

Our=20 view is that long-term trends in the gold price are driven by = changes in=20 the overall level of confidence in the monetary system and the = economy, as=20 best indicated by the long-term trend of the broad stock market = (note:=20 there is no reason why the stock market should be an indicator of = monetary=20 confidence, except that since the 1930s governments have generally = implemented policies that debase the currency and create = uncertainty=20 whenever the economy weakens). We point out, for example, that the = equity=20 bear market of 1966-1982 coincided with a bull market in gold and=20 gold-related investments (gold stocks); that the equity bull = market of=20 1982-2000 coincided with a bear market in gold and gold-related=20 investments; and that the equity bear market that began in 2000 = has, to=20 date, coincided with a bull market in gold and gold-related = investments.=20 Correlation doesn't imply causation, but it makes sense that the = world's=20 favourite repository of savings over the ultra-long-term would = tend to=20 trend inversely to the more speculative investments.

An=20 implication of the above is that almost regardless of anything = else,=20 gold's current bull market will continue until the current equity = bear=20 market reaches its conclusion, which, based on historical = evidence, won't=20 happen until after the average P/E ratio has dropped to single = digits and=20 the average dividend yield has moved above 5%.

Wait=20 a minute: most other commodities also rallied during the 1970s, = trended=20 lower during 1980-2001, and trended upward during much of the = 2000s. How,=20 then, does gold's strong tendency to move counter to long-term = trends in=20 the broad stock market differentiate it from any other commodity? = The=20 answer is contained in the following monthly chart of the gold/CRB = ratio.

To=20 see the true picture it is often helpful to remove the US$ (or any = other=20 fiat currency) from the equation by monitoring the performance of = things=20 in terms of gold (the Dow/gold ratio being a popular example) or = by=20 monitoring gold's performance in terms of other things. = Specifically, to=20 find out what gold REALLY did during any period we can review how = it=20 performed in terms of commodities in general (as represented by = the CRB=20 Index). The following chart makes the point that the gold/CRB = ratio has=20 moved counter to long-term trends in the broad stock market, = meaning that=20 gold has out-performed most other commodities during long-term = equity bear=20 markets and under-performed them during long-term equity bull=20 markets.

Gold's=20 performance relative to other commodities during the 1930s is also = worth=20 mentioning. Whereas most commodities and commodity-related = equities did=20 poorly during the massive equity bear market of 1929-1938, gold = and gold=20 stocks fared extremely well.

Other=20 factors that affect, or are widely believed to affect, gold's = price=20 trend

Although=20 our main purpose today is to deal with the ramifications (or lack = thereof)=20 for the gold market of changes in gold production, we will take = this=20 opportunity to also quickly deal with the effects of central bank = gold=20 sales and changes in jewellery demand. In particular, we want to = quickly=20 explain why the latter are irrelevant and why the former have some = significance, but nowhere near as much as commonly = believed.

The=20 effects of central bank (CB) gold sales

In=20 point form, here is a summary of the central-banking community's = influence=20 on the gold market. Note that we place the gold held by the IMF = and the=20 gold held by government treasury departments (in the US it is the=20 Treasury, not the Fed, that owns the gold reserve) under the=20 'central-banking umbrella'.

1.=20 CBs hold about 30% of the MI gold stock, so they have the ability = to exert=20 influence over gold's short- and intermediate-term price trends. = However,=20 their actual sales over the past 20 years have been too small to = matter.=20 Specifically, the World Gold Council (WGC) reports that CBs = reduced their=20 collective gold reserve at the rate of around 250-tonnes/year = during the=20 1990s and 400-tonnes/year during the first 8 years of the current = decade.=20 (By the way, this means that CBs reduced their gold holdings at a = faster=20 rate during the current bull market than during the final decade = of the=20 preceding bear market, which is consistent with our view that = their sales=20 have not been a significant influence on the price = trend.)

2.=20 News relating to CB gold sales often has a short-term effect, but = does not=20 appear to have altered intermediate-term trends and cannot, in our = opinion, alter long-term trends.

3.=20 CB gold sales represent reduced demand by some holders of the MI = stock,=20 but these sales could actually cause an increase in overall MI = demand.=20 This is because confidence in a fiat currency could fall if the = gold=20 reserves 'backing' that currency were reduced, especially during a = period=20 when confidence was already in a fragile state for other reasons.=20 Something along these lines occurred during the second half of the = 1970s,=20 when gold sales by the Fed (on behalf of the US Treasury) and the = IMF were=20 quickly followed by increases in the gold price.

4.=20 CB monetary machinations (manipulations of interest rates, money = supply,=20 and pretty much everything else to do with money and credit) are = probably=20 of far greater importance to gold's long-term price trend than the = gold=20 sales/purchases they happen to make from time to time.

The=20 effects of changes in jewellery demand

Many=20 gold market analysts attribute great importance to changes in = jewellery=20 demand. For example, we occasionally read analyses where it is = stated that=20 jewellery demand is something like 60% of total gold demand, but = what they=20 really mean is that jewellery demand is 60% of the flow of new = gold=20 (primarily mine supply, but also including scrap supply). In other = words,=20 such analyses completely ignore the huge aboveground supply of = gold and=20 the associated demand for the aboveground supply.

The=20 fact is that changes in annual jewellery demand are even less = significant=20 than changes in mine supply, and should therefore be ignored when=20 assessing gold's prospects.

Anticipating=20 some objections

1.=20 An argument we've come across is that at any given time there may = be few,=20 or perhaps even no, sellers of the existing aboveground gold = supply,=20 resulting in the market being dominated by the regular selling of = gold=20 miners (gold miners continually sell at whatever the market price = happens=20 to be at the time the gold is removed from the = ground).

Well,=20 we know from the LBMA statistics that the selling of gold miners = is small=20 compared to the amount of physical gold that routinely trades via = only the=20 London market. However, even if all current owners of gold decided = to=20 'sit' on their investment in anticipation of higher prices the = selling by=20 the gold mining industry wouldn't have an outsized, or even a = meaningful,=20 effect on gold's price trend. The reason can best be explained by=20 considering the hypothetical example of Bill and Fred, two = shareholders of=20 XYZ Corporation. Bill owns 70% of the outstanding XYZ shares and = Fred owns=20 1% of the outstanding shares. In our example, Fred decides to sell = his 1%=20 stake immediately while Bill plans to wait for a much higher price = before=20 parting with any of his shares. Even though Fred is the one = selling in the=20 present, Bill's decision to hold his shares off the market is = vastly more=20 important, as far as the market's price discovery is concerned, = than=20 Fred's decision to immediately sell. The reason, of course, is = that Bill=20 controls 70-times more shares than Fred. Robert Blumen's article = at http://mises.org/story/3593 goes = more deeply=20 into this concept.

2.=20 It could be argued that industrial metals such as copper also have = huge=20 aboveground supplies if we account for the metal 'stored' in = buildings and=20 other structures. The difference is that this metal is not in = saleable=20 form. For example, almost regardless of the copper price it will = never be=20 economically feasible to tear down functional office and apartment = buildings for the sole purpose of extracting the contained copper, = meaning=20 that the copper wiring and plumbing built into these structures = should not=20 be counted as part of the aboveground supply.

Gold=20 is the only commodity where the "stocks-to-flow" or = "stocks-to-use" ratio=20 is so large that the "flow" component can be ignored. This point = was=20 touched on in an article posted by Steve Matthews, a hedge fund = commodity=20 strategist, at http://www.lbma.org.uk/docs/alchemist/alch32_commodity.pdf.=20 Mr. Matthews concludes: "It's fair to say that nothing else = even comes=20 close to gold's 7,019 days [of remaining supply]. This leads us to = a=20 proposition that I'm sure some of you have thought about before: = the right=20 way to trade gold is as a foreign currency, not as a commodity. = You would=20 need someone else to give you a trading recommendation; I abdicate = my duty=20 to declare myself bullish or bearish flat price in the face of = what I=20 consider overwhelming evidence that gold resides outside my = supply/demand=20 analytical framework."

(Chart=20 data from USGS for all years prior to 2006 = and from=20 the World Gold Council for 2006 onward)

Conclusion

Gold=20 market analyses -- such as those put together by Gold Fields = Mineral=20 Services (GFMS) -- that treat new mine production as if it = represented a=20 substantial chunk of the total gold supply, and/or that place = great=20 importance on factors such as jewellery demand and scrap supply, = are of no=20 use to anyone whose goal is to understand what drives the gold = price. In=20 fact, such analyses are worse than useless because they create a = false=20 impression. The reality is that the contribution to total gold = supply made=20 by newly-mined gold is so small that changes in mine production = should be=20 considered irrelevant when assessing gold's upside potential = relative to=20 its downside risk.

*The=20 108,000-tonne figure is derived from the analysis presented by = James Turk=20 in his 1993 booklet "Do Central Banks Control the Gold Market". In = this=20 booklet Mr. Turk estimated that the amount of monetary/investment = (MI)=20 gold was 72.7% of the total aboveground gold supply at the time = (1993). To=20 arrive at the 108,000-tonne estimate for the current stock of MI = gold, we=20 have assumed that the ratio of MI gold to total aboveground gold = is the=20 same now as it was in 1993.

Steve=20 Saville

The Speculative=20 Investor

Tous les articles par Steve=20 Saville

Steve=20 Saville publie r=E9guli=E8rement des analyses et des pr=E9visions = sur son site =E0=20 l=92adresse suivante : =20 www.speculative-investor.com.

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